South Korea's Central Bank Advocates Cautious Rollout of Won-Based Stablecoins

South Korea’s central bank has expressed a cautious stance on the introduction of stablecoins, advocating for a slow and controlled rollout. Deputy Governor Ryoo Sang-dai of the Bank of Korea (BOK) emphasized that any rollout of won-based stablecoins must start with commercial banks, which are under a high level of regulations, and gradually expand to the non-bank sector with the experience gained.

The central bank's concern stems from the potential impact of stablecoins on monetary policy and transaction settlements. Ryoo warned that introducing stablecoins could affect these areas, echoing earlier warnings by Governor Rhee Chang-yong about cross-border capital flows. The central bank insists on building experience and structure before supporting a broad release of stablecoins.

Stablecoins are crypto tokens designed to match the value of fiat currencies, usually pegged to something like the US dollar. They are used by traders to move quickly between coins and exchanges, and some companies are starting to adopt them for settlements. South Korea is interested in a version pegged to the won, but the central bank is not rushing the process.

The new government in South Korea also plays a significant role in this matter. President Lee Jae Myung, from the Democratic Party, had promised during his campaign to open doors for companies to issue won-based stablecoins. This promise is now moving toward law, with the party proposing legislation to create a full regulatory setup. The goal is to prevent South Korea from falling behind other markets already experimenting with national stablecoins.

Ryoo also addressed other economic concerns, including housing and household debt. He noted that the BOK considers both rising home prices and ballooning debt as key risks. The recent interest rate cut moved the benchmark rate into the middle of the neutral range, giving the central bank flexibility to either lower or raise rates as needed.

The Bank of Korea is also preparing for a second pilot test of its central bank digital currency (CBDC). Ryoo mentioned that the bank will work with commercial lenders on the next phase, depending on how the administration’s digital policy develops. The first test, which started in late 2023, is ending soon. Additionally, the government is working on foreign exchange market reform, aiming to speed up the opening of South Korea’s currency market to more foreign investors.

The central bank's cautious approach to stablecoins reflects a broader trend of central banks around the world grappling with the implications of digital currencies. The Bank of Korea's warning serves as a reminder that while stablecoins offer innovative solutions, they also present significant challenges that must be carefully managed. As the financial landscape continues to evolve, the gradual and controlled rollout of stablecoins, as advocated by the Bank of Korea, may be the key to ensuring stability and sustainability in the financial sector.